California taxes: too high or too low?

California's perpetual budget crisis and voters' rejection of five budget-related ballot measures last week have renewed the perennial debate over whether Californians are, to borrow a comparison from “The Three Bears,” taxed too much, too little or just about right.

Much of the positioning is ideological, and therefore immune to being affected by data and fact.

Any level of taxation is too high to those on the political right, and no level is sufficient to those on the left. But for those who are less ideologically rigid, relative tax burden is significant because it shows where we stand vis-vis other states and is an indication of whether we are getting sufficient bang for the public buck.

Historically, at least until the tax revolt that began with Proposition 13 in 1978, California was a relatively high-tax, high-service state.

Data from the Washington-based Tax Foundation rank California as having the nation's third-highest state-local tax burden in 1978, at 11.7 percent of personal income. The national average at the time was 10.3 percent.

Proposition 13, which slashed property taxes, and the state tax cuts quickly enacted by the Legislature to demonstrate that it had gotten the anti-tax message, dropped California to 22nd in 1979, at 9.8 percent of income.

Since then, taxation has increased to 10.5 percent, raising us to sixth highest in the nation in 2008. And the income, sales and vehicle tax boosts enacted by the Legislature in February would presumably have pushed the percentage even higher – except that the severe recession has also cut deeply into state and local government revenues.

The state alone expects to receive some $14 billion less in general fund revenue during the 2009-10 fiscal year than it did in 2007-08, even with the boosts in income and sales tax rates. And that means that Californians' overall tax burdens have actually declined – a silver lining of sorts on the otherwise very dark economic cloud.

We are being taxed less because we are earning less – with some 2 million Californians on the unemployment roles – and spending less on taxable goods.

Rough calculations indicate that California taxes will decline, in relationship to personal income, by a full percentage point, to just about where they were after Proposition 13 passed in 1978. And our rankings vis-vis other states will also drop to somewhere in the middle, maybe 24th or 25th, just about where we were in 1979 as well.

When those new taxes expire in a couple of years, Californians' relative tax burden could also drop further – but if the economy is rising by then, it could also mean a surge of revenues even when the increased rates disappear.

If nothing else, these data indicate that while income and sales tax rates may make a difference, the economy is the biggest factor in how much tax Californians pay in aggregate.

When the economy rises, so do tax collections, and when it falls, revenues fall with it.